The NSE maintains 15 strategy indices, each of which are based on a unique quantitative method. Collectively, they are referred to as a smart beta strategies. In this post, I would like to present a short introduction to six of them which I believe could be more stringent alternative benchmarks for mutual funds. They could (and are) candidates for index funds or ETFs.
Most active mutual funds intelligently choose the popular indices like Sense, Nifty, BSE 100, 200, NSe 500 and the like. These are based on market cap alone and are easy to beat either by choosing different weights of the same stocks or by including stocks which are not part of the index.
Over the last 10 years, 26/33 (79%) active large cap funds have beat index funds. The remaining 7 funds are duds and investors can easily discard them.
1) In the large-cap category, there are many index funds and it is easy to compare the performance of an active fund with an index fund (where dividends are reinvested) instead of a price index. Even here, a more stringent large-cap based quantitive index would be a better yardstick.
2) In the mid-cap category, there is just one index fund (Principal index mid-cap) and one ETF MOST M100. And over the last 5 years, only 3/31 funds have done worse than M100. Here again, we need stringent benchmarks to spot consistent out-performance.
3) In the multi-cap category, we have the Goldman Sachs CNX 500 fund (not an ETF), ICICI and IDBI Nifty Jr index funds and Goldman Sachs Nfity Jr ETF funds.
Quite amusingly, and much to my surprise, the GS Nifty Jr ETF seems hard to beat! Over the last 10 years, only 9 out of 37 active funds beat it!
10-year return rank: 10/42
5-year return rank: 26/64
3-year return rank: 60/138
1-year return rank: 30/153
This is a huge surprise to me! And has thrown me off track a bit. The newer SBI Nifty Jr ETF has done even better recently!!
Is the Nifty Jr a suitable benchmark for multi-cap funds? What do you think?
Caution: Do not be tempted to invest in such ETFs. They may not be traded as much as the Nifty Bees.
Moral: The strategic indices must be compared with the Nifty Jr.!
4) Finally, The small-cap category has no index funds.
The point I wanted to make (before the Nifty Jr surprise hit me) is, if we are going to compare the performance of active funds with cap-based indices,then it should be the total returns index (dividends reinvested) and not the price index alone.
The strategic indices listed below (finally!) could be a more tougher alternative.
This is the snapshot of the 15 strategic indices. Those marked are the ones which I think can form suitable benchmarks.
Those interested can explore this page from the NSE.
Nifty Value 20 (NV20)
I had written about this in some detail before: Nifty50 Value 20 Index (NV20) as a mutual fund benchmark
The NV20 comprises of 20 stocks from the Nifty 50 with low PE, PB, high ROCE (return on capital employed) and Div Yield. You can refer the above post for the exact ranking procedure.
As shown previously, I think this makes a very good large cap mutual fund benchmark.
Nifty Growth Sector 15
Key highlights: Sectors that exhibit PE and PB on average greater than the Nifty are first selected. Then, top 50% market cap of all such stocks are shortlisted and ranked in terms of EPS growth. Top 15 in the list forms the index.
This is not diversified enough to be used as a benchmark. However, in case you like the idea of portfolio Diversification with sector mutual funds, then the sectors here can give you a head start. This could also be a good benchmark for an individual stock porfolio.
Nifty 50 Low Volatility (NLV50)
I wrote about this just yesterday: Nifty Low Volatility 50: A Benchmark Index to watch out for
Although this is independent of market cap/sector and only goes by low volatility (standard deviation of daily returns), this could be suitable for the multi-cap category. It can have any stock within the top 300 in terms of market cap.
The NLV 50 has done better than the Nifty Jr or the Nifty Next 50 as it known today. Can't wait to see how multi-cap fare against this.
Nifty Quality 30 (NQ30)
This is a portfolio of 30 stocks that show signs of a "durable business model". A quality score is assigned after considering ROE, Debt/Equity and Profit After Tax for the last three financial years.
It seems to be a fairly involved calculation compared to the NLV50 but it does not fare better than the Nifty Next 50 (Jr) in terms of returns (although it is less volatile)
Nifty Alpha 50 (Alpha50)
Alpha is a measure of out-performance with respect to a risk-free rate and correlation with a given index. The alpha 50 is an index of 50 stocks that has the highest alpha among the top 300 stocks in terms of market cap is selected.
The selection is identical to the NLV50, except that alpha is used instead of standard deviation. However, it is not clear to me what the risk-free rate and index for comparison (beta calculation) are.
In any case, the index is diversified enough to be used as a mid-cap index.
And this is the full evolution (from the fact sheet)
Nifty Dividend Opportunities 50
Top 50 stocks ranked in terms of dividend yield from the top 300 stocks (market cap) make up this index. Probably suitable as a benchmark for dividend yield funds.
Here are the alternative benchmarks that I would use for different mutual fund categories
Large Cap: Nifty Value 20
Mid-cap: Nifty Alpha 50 (small caps too?)
Multi-cap: Nifty Next 50 (Jr), Nifty Low Volatility 50, Quality30
Div yield funds: Nifty Div Opp 50
Stock portfolio or sector fund portfolio: Nifty Growth 15
Freefincal mutual fund analysis tools will soon be updated with these benchmarks.
Subscribe to get posts via email"How to" articles; unbiased analysis; free, yet comprehensive calculators and money Management solutions delivered to your inbox!
Buy our New Book!You Can Be Rich With Goal-based Investing A book by P V Subramanyam (subramoney.com) & M Pattabiraman. Hard bound. Price: Rs. 399/- and Kindle Rs. 349/-. Read more about the book and pre-order now!